Public governance

Japan will need reforms to ease economic blow of a shrinking workforce

11/04/2016 - Japan must make revitalising growth its number one priority with reforms to boost productivity and encourage more women and older people into jobs to compensate for its rapidly shrinking labour force, according to the OECD. Japan’s population is set to shrink to 100 million by 2050 from a peak of 128 million in 2010. Life expectancy of 83.5 years is pushing up the old-age dependency ratio. Both trends are most severe in rural areas.

The OECD’s 2016 Territorial Review of Japan finds that demographic change knocked more than half a percentage point off Japan’s annual economic growth rate over 1999-2011. It warns of the pressure on public spending from rising pension, health and long-term care costs as the share of people over 65 in the population rises from 26% today to around 40% by 2050, the highest in the world.

Yet a declining population should allow more flexibility in land use, enabling cities to build more green spaces or community development projects as density eases, the Territorial Review says. It should reduce traffic congestion and ease pressure on housing prices and the environment. A larger elderly population could create demand for new goods and services and provide an experienced and flexible workforce for part-time jobs, entrepreneurship or volunteering.

In particular, the Territorial Review welcomes Japan’s 2015 National Spatial strategy as a step towards tackling the demographic transition. It suggests making cities more compact and improving links between them. The Review also recommends adapting policies in areas from city planning to employment to limit the impact of the rapid shrinking and ageing of the population. With the right policies, increased longevity among workers and less-dense towns and cities could bring opportunities for innovation, growth and well-being, the Review says.

In a broader Better Policies Series Report on Japan’s economic challenges the OECD makes suggestions on how to boost Japan’s productivity. This will require progress on the third arrow of Abenomics, according to the Report. Japan needs to press forward with trade integration and make its corporate sector more dynamic through improved corporate governance and product market reform. Moreover, while Japan has a high level of R&D, the return on such investment could be improved by strengthening university-business linkages and encouraging greater mobility of researchers.

The Better Policies Series Report also calls for policies that make it easier for both men and women to combine work and family life, in part by changing Japan’s culture of long working hours. Moreover, Japan needs to expand affordable access to quality early childhood education and care. This can help increase the employment rate of women, which currently is 18 percentage points below that of men. In addition, the employment opportunities for older people need to be improved, notably by enhancing their ICT skills and fostering lifelong learning. Such measures will not only boost growth but also contribute to a more inclusive society.

The Report also stresses the urgency of tackling Japan’s fiscal challenges. The government could build confidence in its fiscal situation by implementing a more concrete strategy for bringing down the public debt to GDP ratio, something that will require all three “arrows” of Abenomics to be working in concert. Raising the eligibility age for pensions and long-term care programmes could help curb spending.

“Japan’s demographic challenge is daunting but not insurmountable,” said OECD Secretary-General Angel Gurría, presenting the two reports in Tokyo. “Ageing societies do bring costs, but having workers and consumers living longer is of course a good thing in itself, and can also be an economic asset. Japan’s experience will be closely watched by other countries facing similar transitions in the future.”

The press conference remarks on the Better Policies Series report are available here.